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Speaker 2: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 1: Hello and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway.

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Speaker 3: And I'm Joe Wisenthal.

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Speaker 1: Joe, do you remember when you first heard the term

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Speaker 1: mag seven?

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Speaker 3: You know, I don't if I'm being honest, but you

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Speaker 3: know these achronyms that for big tech stocks, like they

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Speaker 3: kind of you know, people used to talk about Fang, right.

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Speaker 1: I know, I was just thinking that, like, when did

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Speaker 1: the handoff from Fang to mag seven actually happen.

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Speaker 3: We need to do one of those like Google trends

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Speaker 3: and gram things. That's a good question because and then

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Speaker 3: there was like fang plus and then fam and but

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Speaker 3: they're all kind of the same thing. It's just big

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Speaker 3: tech stocks, right.

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Speaker 1: So the terminology the acronyms might change, but I think

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Speaker 1: the subject is always kind of the same and the

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Speaker 1: concern is always the same. It's this idea that there

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Speaker 1: is like a handful of big companies, usually tech stocks,

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Speaker 1: that are driving the entire market.

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Speaker 3: Yeah, and it drives people crazy, right, they're so big,

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Speaker 3: and they've grown so much, stocks have done so well

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Speaker 3: over the years, and all these old strategies of like

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Speaker 3: oh we're gonna like buy cheap or buy cheap low

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Speaker 3: book value, you know, price to book and all these

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Speaker 3: traditional investing patterns. It never mean reverts for years and

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Speaker 3: years and years, except for like five minutes in twenty

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Speaker 3: twenty two. They just go straight up. And the only

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Speaker 3: test of whether you're a good investor or not is

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Speaker 3: whether you're over whether you bought ten Yeah.

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Speaker 4: That's it, is it?

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Speaker 1: Really? That really is the alpha now is But you know,

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Speaker 1: you see these numbers thrown around like I think Goldman

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Speaker 1: Sachs said that the top ten stocks now account for

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Speaker 1: something like thirty eight percent of the S and P

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Speaker 1: five hundred, which is a record, yeah, and seems quite

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Speaker 1: a lot on the face of it. And I saw

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Speaker 1: another number out there saying twenty six stocks now account

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Speaker 1: for half of the entire value of the S and

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Speaker 1: P five hundred. So I think it brings up a

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Speaker 1: bunch of interesting questions. How bad is the concentration? Is

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Speaker 1: it intrinsically bad in and of itself? Is it actually

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Speaker 1: that risky?

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Speaker 3: Yeah?

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Speaker 1: And also how are financial professionals and the market itself

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Speaker 1: actually reacting to this concentration risk?

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Speaker 4: So I think we should talk about it totally.

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Speaker 3: You know, I look at myself in the mirror, and

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Speaker 3: I say to myself.

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Speaker 1: Do you point at yourself like that meme?

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Speaker 3: I And some days I point and say you're a

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Speaker 3: good because you know, I'm just like a boring index

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Speaker 3: fund investor for my retirement, you know, So I point say, oh,

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Speaker 3: you're a good investor because you've been really long tech.

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Speaker 3: And then I and then on other days they wake

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Speaker 3: up and say, oh, you are really heavily exposed to

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Speaker 3: twenty six stocks, And so you know, it's like to

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Speaker 3: you know, glass half full. It's like good, but also

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Speaker 3: makes me a little anxious.

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Speaker 1: You shouldn't take credit. You should give that credit to

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Speaker 1: SMP and thank you, and then when the market collapses

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Speaker 1: you should blame them.

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Speaker 4: I do.

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Speaker 3: I say thank you to the wonderful fund managers at SMP.

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Speaker 3: I only wish you hadn't. You know, every once in

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Speaker 3: a while they have a dud. It's like why did

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Speaker 3: you pick that one anyway?

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Speaker 1: Or why didn't you include?

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Speaker 2: Yeah?

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Speaker 1: Kay, exactly, all right, Well, without further ado, we do,

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Speaker 1: in fact have the perfect guest for this topic, someone

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Speaker 1: that I've wanted to speak to for a long time

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Speaker 1: and I can't believe we haven't had him on the

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Speaker 1: podcast before major oversight on our part. We're going to

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Speaker 1: be speaking with Kevin Muhror. He is, of course the

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Speaker 1: Macro tourist and a long time voice on finn Twit

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Speaker 1: and writing on his blog as well. So Kevin, thank

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Speaker 1: you so much for coming on all thoughts.

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Speaker 4: It's great to be here. Thanks Joe and Tracy.

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Speaker 1: Maybe just to begin with, it's the first time you're

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Speaker 1: on the show. I've always sort of known you as

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Speaker 1: this voice that's hanging around in the finance BLOGI sphere.

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Speaker 1: But what's your background?

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Speaker 5: So I was the equity derivative institutional equity derivtive trader

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Speaker 5: at RBC Dominion Securities in the nineties. I was kind

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Speaker 5: of at the forefront of the technological boom and the

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Speaker 5: automated trading and the index trading and the taking off

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Speaker 5: of all these index products. And then in two thousand

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Speaker 5: I actually went off on my own and I thought, maybe,

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Speaker 5: you know, I'll go work for a hedge fund. And

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Speaker 5: I thought, well, at the same time, I could go

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Speaker 5: and trade for myself for a little bit and see

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Speaker 5: how that goes. And that's kind of twenty five years

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Speaker 5: later and I'm still doing it.

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Speaker 3: You write the macro Tourist, what's your goal? What do

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Speaker 3: you for those I we're both big fans of your writing,

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Speaker 3: But what do you what do you like to write about?

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Speaker 3: What's your sort of goal with your writing?

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Speaker 5: Well, Joe, it originally started off as a diary, and

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Speaker 5: I just kind of good traders, you're supposed to keep

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Speaker 5: a diary, and and I would start writing things and

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Speaker 5: then people would pull me up and ask me what

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Speaker 5: I thought of the market, and I would send it

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Speaker 5: off into the mot just so well, here's what I

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Speaker 5: wrote my diary. Eventually they started to ask often enough

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Speaker 5: that we just started to put it up on the net,

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Speaker 5: and then it took off from there, and from there

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Speaker 5: I ended up going and actually started my podcast and

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Speaker 5: meeting all sorts of people. And one of the kind

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Speaker 5: of just great parts about being on the podcast is

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Speaker 5: the fabulous people I got to meet along the way.

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Speaker 5: I meet people like Jim Lightner and I've had Mike

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Speaker 5: Masters on the podcast, and those people are market wizards.

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Speaker 5: They're terrific, and I get to share ideas with them,

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Speaker 5: and it's just that considers myself one of the luckiest

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Speaker 5: guys in the world.

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Speaker 1: So let's get to the topic at hand. Then give

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Speaker 1: us some context around concentration risk in something like the

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Speaker 1: S and P five hundred right now. I threw out

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Speaker 1: some numbers earlier, But how extensive is this concentration and

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Speaker 1: should we be worried about it?

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Speaker 5: Well, Tracy, one of the things that people will kind

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Speaker 5: of push back on when you say that the US

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Speaker 5: has become more concentrated is they'll say things like, oh,

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Speaker 5: but if you go look at other indexes around the world,

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Speaker 5: they're also very concentrated. And that's absolutely correct, There's no

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Speaker 5: doubt about it. This is something that is experienced in Canada.

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Speaker 5: As I mentioned, I'm a Canadian and I was on

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Speaker 5: the index desk at a time when Noortel was actually

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Speaker 5: thirty five percent of the entire index.

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Speaker 1: Wow.

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Speaker 5: So if you think that you guys are we're having

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Speaker 5: troubled dealer with this, now, just imagine having thirty five

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Speaker 5: percent of the index being one stock. It was actually

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Speaker 5: even worse than that because we had kind of a

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Speaker 5: palm at triple M situation where Bell Canada was one

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Speaker 5: of our next biggest stocks and it main holding with

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Speaker 5: all of its Nortel holding. So it ended up being

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Speaker 5: that the index managers were stuck because if you think

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Speaker 5: about it from a fiduciary point of view, it doesn't

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Speaker 5: make sense to have fifty percent of your portfolio, you know,

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Speaker 5: exposed to one stock. It's risky. And so one of

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Speaker 5: the things that I well that I'm hearing now when

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Speaker 5: you bring up the problems about concentration risk in the

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Speaker 5: US is they'll say, oh, no, but don't worry. It's

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Speaker 5: actually much better than the rest of the world. And

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Speaker 5: I won't deny that for a second. But isn't that

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Speaker 5: kind of like saying, you know, my Mercedes is now

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Speaker 5: using plastic knobs, but don't worry, the Honda uses plastic

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Speaker 5: knobs too. Part of the reason that we've been that

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Speaker 5: investors have been attracted to the US is that it

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Speaker 5: is a diversified basket of many stocks. And just think

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Speaker 5: about you know, Warren Buffett, Warren Buffett tells you can

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Speaker 5: buy the S and P five hundred, you can sleep

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Speaker 5: at night. But if you go and talk to investment

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Speaker 5: advisors around the world and you ask them, do you

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Speaker 5: think your clients really truly know what's underlying that basket?

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Speaker 5: I think they most of them would say they would

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Speaker 5: assume that it's it's roughly equal weight, and they would

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Speaker 5: be shocked to learn that, you know, Microsoft and Navidia

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Speaker 5: Apple are each almost seven percent of their basket for

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Speaker 5: a total of twenty one percent. And so it's ends

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Speaker 5: up being it's a worrisome kind of new development in

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Speaker 5: the US. And I don't buy the argument that just

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Speaker 5: because other countries are more, you know, it's concentrated, that

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Speaker 5: we shouldn't worry about.

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Speaker 4: It in the US. And all you have to do

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Speaker 4: is look you, Teresa.

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Speaker 5: You mentioned that Goldman Sachs stat and they have another

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Speaker 5: one that they published and they went back, they looked

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Speaker 5: at concentration risk throughout the last century, and if you

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Speaker 5: look at it, we are now just as concentrated as

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Speaker 5: we were right in front of the Great Depression in

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Speaker 5: nineteen twenty nine, in the nifty to fifty in the

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Speaker 5: early seventies, and the dot com bubble in the late nineties. Well,

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Speaker 5: all those times were not good times to buy stocks

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Speaker 5: for forward returns. So increasingly I think that we need

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Speaker 5: to be aware that this is a risk, and there's

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Speaker 5: more and more conversation happening around that.

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Speaker 3: I'm happy that in Nvidia has been seven percent or

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Speaker 3: somewhere south of that. In my portfolio, I didn't even

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Speaker 3: have to do anything, and I made a big allocation

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Speaker 3: to one of the best performing stocks in the world.

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Speaker 3: And not only that, I mean, I take your point

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Speaker 3: about concentration and et cetera, and obviously very alarming. These

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Speaker 3: are also account for a huge share of the actual

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Speaker 3: earnings too, So I mean, you know, there was a

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Speaker 3: lot of concentration in ninety nine, two thousandth tech, but

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Speaker 3: a lot of those companies weren't really making that much money.

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Speaker 3: These companies are earnings juggernauts.

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Speaker 5: Well, no doubt, you're absolutely correct, Joe. And that's kind

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Speaker 5: of the pushback to this argument that we're concentrated world.

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Speaker 5: They'll say, oh, it's bang seven. It's a wide variety

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Speaker 5: of different companies that do with different things. It's not

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Speaker 5: like it's all one industry. And not only that, the

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Speaker 5: valuations aren't as crazy as they might seem, no doubt

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Speaker 5: about it. You can make that argument. But let's just

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Speaker 5: imagine tomorrow that the AI bubble doesn't live up to

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Speaker 5: its hype. Let's imagine that all of a sudden we

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Speaker 5: have some sort of earning surprise and these stocks get had.

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Speaker 5: It's not that hard to imagine. We went through it

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Speaker 5: in twenty twenty two. So if that occurs, I think

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Speaker 5: that people will be quite shocked at how they're supposedly

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Speaker 5: diversified basket of stocks performs. And more importantly than that

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Speaker 5: is that we can sit around and we can debate

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Speaker 5: whether you should own this or whether this is prudent.

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Speaker 5: But more and more fiduciaries, more and more risk managers,

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Speaker 5: more and more institutional portfolio managers are looking at it.

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Speaker 5: And saying this is dangerous and they're looking for ways

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Speaker 5: around it. And one of the things that many of

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Speaker 5: these managers are bumping up against is that although the

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Speaker 5: S and P five hundred is actually in line with

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Speaker 5: this following rule of this thing called the twenty five

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Speaker 5: five point fifty, which means that no one stock can

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Speaker 5: have more than twenty five percent and the five stock

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Speaker 5: the biggest stocks that are over five percent can't add

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Speaker 5: up to more than fifty percent of your portfolio. That's

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Speaker 5: an IRS rule that is called the twenty five five

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Speaker 5: to fifty rule. There's no problem with the SMP five

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Speaker 5: hundred currently with that rule, but there is some thing

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Speaker 5: called the Russell one thousand growth index, and increasingly more

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Speaker 5: and more institutional managers are benched to that index. And

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Speaker 5: what we're seeing is within that index, we're bumping up

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Speaker 5: against that. And what's happened now is that Russell's realized

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Speaker 5: that this isn't just kind of a fiduciary point of view,

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Speaker 5: this is actually an IRS issue in terms of that

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Speaker 5: they cannot go over those things. So what we're seeing

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Speaker 5: is there's changes in the rules coming to make sure

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Speaker 5: that these indexes capped.

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Speaker 3: By the way Tracy Kevin mentioning how exposed everyone is

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Speaker 3: to AI beta, so to speak, And I just want

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Speaker 3: to give a plug. We had a really good contribution

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Speaker 3: in the odd Lot's Newsletter from a Skanda recently on

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Speaker 3: this whole thing. There's just both in stocks and the

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Speaker 3: economy and the real economy. There's just this like we

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Speaker 3: get they better get this AI thing right.

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Speaker 1: Yeah, seems kind of important. Kevin. You mentioned finance professionals

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Speaker 1: reacting to this concentration risk. So okay, maybe your average

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Speaker 1: mom and pop retail investor doesn't realize that the S

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Speaker 1: and P five hundred is not you know, five hundred

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Speaker 1: equal weighted stocks, but certainly finance professionals do, and they're

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Speaker 1: aware of both the risk involved in having a large

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Speaker 1: concentration in just a handful of stocks and also some

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Speaker 1: of the requirements around diversification, so legal requirements that you

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Speaker 1: just mentioned. Before we get into some of those changes,

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Speaker 1: can you maybe just give us a little bit of

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Speaker 1: background on the importance of the index providers to the

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Speaker 1: finance industry itself. This is sort of a pet topic

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Speaker 1: of mine that I've written about occasionally, But how big

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Speaker 1: a deal are the index providers now?

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Speaker 5: Well, You're absolutely right to highlight that, Tracy, and I'm

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Speaker 5: glad to see you have such a an enthusiastic come

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Speaker 5: attraction to index providers.

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Speaker 4: One of the you're the only one that gets excited

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Speaker 4: about it. But it is a big story.

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Speaker 5: And one of the issues is that as indexing has

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Speaker 5: become more popular, some of the kind of traditional the

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Speaker 5: first of the indexers have started charging more, which has

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Speaker 5: created an opportunity for other index providers to jump into

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Speaker 5: the loop. So obviously we all know the S and

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Speaker 5: P five hundred, but then there's the foot seat, which

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Speaker 5: is rustle, but there's also things like morning Star and

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Speaker 5: even you guys at Bloomberg have a lot of great

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Speaker 5: indexes and you're competing on a lot of these things

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Speaker 5: as well. So what's driving that is kind of two factors.

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Speaker 5: One of them is that there is the cost associated

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Speaker 5: with the big ones, so they're just trying to clients

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Speaker 5: that have to pay tens and hundreds of thousand dollars

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Speaker 5: for this index data. Is our changing the providers trying

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Speaker 5: to get something cheaper. And then the other thing is

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Speaker 5: is a little more kind of nefair. There's some indexes

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Speaker 5: that are easier to beat, so if you have an

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Speaker 5: index that you know the rules, you can actually front

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Speaker 5: run them. The When I was researching this and learning

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Speaker 5: about this, someone told me that it's important that you

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Speaker 5: buy the products of the index of the indexes that

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Speaker 5: are difficult to beat, and then from a kind of

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Speaker 5: client perspective, you choose. If you are a portfolio manager,

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Speaker 5: you choose the indexes that are easier to beat, because

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Speaker 5: if you're using, you know, for example, the S and

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Speaker 5: P five hundred as your benchmark, that's a lot more

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Speaker 5: difficult than to beat than another index that might have

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Speaker 5: one annual revision that is easy to kind of forecast

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Speaker 5: and run ahead of.

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Speaker 4: Joe.

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Speaker 1: I should just mention Kevin was kind enough just then,

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Speaker 1: because he's a very polite Canadian, to basically do our

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Speaker 1: disclaim for us, which is that Bloomberg LP, the parent

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Speaker 1: company of Bloomberg News, does own a bunch of different indices,

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Speaker 1: but probably most prominent among them are the Bloomberg bond indices,

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Speaker 1: and those were the Barclays indices before. So I should

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Speaker 1: just mention.

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Speaker 3: That there you go, Thank you, Kevin, and thank you.

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Speaker 5: Can I jump in with you a little since a

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Speaker 5: lot of people are getting Bloomberg users. One of the

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Speaker 5: things is if you go when you want to see,

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Speaker 5: for example, the index move and the S and P

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Speaker 5: five hundred, and you to type in hmov, you'll see

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Speaker 5: that they actually unless you pay for that data, you

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Speaker 5: don't get the index point changes. But Bloomberg has the

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Speaker 5: B five hundred, which is very similar, and you can

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Speaker 5: plot it in and then all that functionality that you

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Speaker 5: have to pay for on the other things, it actually

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Speaker 5: works quite well on the Bloomberg indyssees.

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Speaker 3: There you go. So if you have a Bloomberg terminal

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Speaker 3: but don't feel like paying for the S and P

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Speaker 3: data specifically, Kevin just gave you a little bit of

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Speaker 3: a little bit of alpha there.

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Speaker 2: But you know it.

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Speaker 3: Actually you talked about foot running index changes. Why said

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Speaker 3: it easier?

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Speaker 1: Right?

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Speaker 3: Like S and P they announced, oh, some new company

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Speaker 3: is joining an index. How can you make money from

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Speaker 3: those announcements?

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Speaker 4: Well, you used to be able to.

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Speaker 5: There's a huge opportunities before, and there was hedge funds

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Speaker 5: that devoted themselves to doing it. But now everyone knows

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Speaker 5: the ones that are due to go in. And then

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Speaker 5: there's hedge funds who actually have portfolios of all the

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Speaker 5: stocks that are due to go in and even not

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Speaker 5: just hedge funds, even pension funds will quote and front

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Speaker 5: run them because they realize that there's some malfa there.

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Speaker 5: So at the end of the day, Joe, the problem

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Speaker 5: is that the more people look at it, the less

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Speaker 5: money there is to be made. Yeah, and kind of

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Speaker 5: trying to guess those things.

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Speaker 1: All right, So let's get into how not just the

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Speaker 1: benchmark index providers are reacting to increased concentration, but also

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Speaker 1: how finance professionals are. You mentioned the Russell one thousand,

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Speaker 1: so give us a little bit more detail on what's

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Speaker 1: happening there. So Russell one thousand is aware that there's

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Speaker 1: intense concentration risk.

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Speaker 5: Right, so they're jumping so they are actually getting ahead

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Speaker 5: of their problems of potentially going and bumping up against

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Speaker 5: this twenty five to five fifty rule. And for those

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Speaker 5: who don't aren't aware of it, this isn't a new phenomenon.

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Speaker 5: We actually had this in the summer of twenty twenty

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Speaker 5: three when Microsoft became too large of a position within

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Speaker 5: the QQQS and there needed to be an emergency rebalance

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Speaker 5: where they reduced the size of Microsoft. And then we

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Speaker 5: also saw this in the sector select XLK spider where

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Speaker 5: Navidia ran up and it actually ended up again we

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Speaker 5: bumped up against that twenty five to five to fifty

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Speaker 5: rule and they needed to be an emergency rebalancing there.

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Speaker 5: And that was the situation where there was the way

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Speaker 5: that their capping worked. It was this kind of very

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Speaker 5: violent shift from selling Apple and buying Navidia, and then

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Speaker 5: kind of the next quarter it flipped the other way

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Speaker 5: because of the way that the stock price has moved

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Speaker 5: and they had to do this rebalance again the other way.

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Speaker 5: And so this is the problem with that many of

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Speaker 5: these index providers are are kind of bumping up against

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Speaker 5: it in terms of they don't want to be too

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Speaker 5: violent with their shifts. They don't want to go and

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Speaker 5: get into situations where they're rebalancing all the time, trying

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Speaker 5: to keep within this limits. And that is why the

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Speaker 5: Russell in this R one thousand growth which is one

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Speaker 5: of the most popular growth indexes out there, they chose

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Speaker 5: instead of using the five and the fifty rule, they

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Speaker 5: used four and a half and forty five, meaning that

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Speaker 5: any stock above four and a half, if all those

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Speaker 5: stocks add up to forty five percent, then they do

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Speaker 5: this rebalance. So they've kind of given themselves a little

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Speaker 5: bit of extra, you know, room there in terms of

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Speaker 5: the rebounce. What's interesting is that they had announced this

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Speaker 5: I don't know what's a year ago because they saw

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Speaker 5: this problem coming. Nobody was talking about it.

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Speaker 1: Oh yeah. I actually went back to try to find

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Speaker 1: articles on this. I couldn't find any.

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Speaker 4: Yeah.

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Speaker 5: The way that I came upon this idea and this

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Speaker 5: kind of revelation about that this is coming up was

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Speaker 5: actually one of my subscribers and a buddy sent me

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Speaker 5: something from Kevin Ja from Discipline Alpha, and he'd written

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Speaker 5: this whole piece about it and just highlighting it. One

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Speaker 5: of the reasons that he highlighted is he was a

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Speaker 5: mid cap manager during the two thousands and he distinctly

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Speaker 5: remembers Sebel Systems and another one. I can't remember the

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Speaker 5: other one, but there was two big stocks in the

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Speaker 5: S and P four hundred that were due to go

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Speaker 5: into the S and P five hundred, and when they

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Speaker 5: did it, the trouble was that the guys that all

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Speaker 5: bought it for the S and P five hundred, and

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Speaker 5: then when the SNB four hundred guys went to sell it,

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Speaker 5: there was no bids. And then coincided with the top

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Speaker 5: of the Nasdaq market, and he's very kind of adamant

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Speaker 5: that this is could be another situation where we have

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Speaker 5: a situation where the MAG seven has to go down

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Speaker 5: in waiting in one of the biggest indexes out there

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Speaker 5: in terms of after the S and P five hundred,

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Speaker 5: this is probably the next biggest growth index out there.

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Speaker 5: And when this rebalance occurs, which again is in March, ironically,

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Speaker 5: it's the same deal. There's going to be millions and

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Speaker 5: millions of shares of these mag sevens for sale. And

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Speaker 5: so for me, when I was trying to learn about it,

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Speaker 5: I went and said, okay, I went to an old

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Speaker 5: buddy at TD and they were one of the few,

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Speaker 5: and I think he said he was the first cell

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Speaker 5: side dealer to actually start talking about this. But increasingly

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Speaker 5: over the last month there's been more and more folks

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Speaker 5: paying attention and realizing that this is a bigger deal

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Speaker 5: than they really.

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Speaker 3: By the way, as tracing those I love dot com

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Speaker 3: you're trivia and talking about that, and so like you

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Speaker 3: talk about Sebel and you talking about the three comm

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Speaker 3: Palm situation and all the these are like these are

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Speaker 3: some of my CATNP for Yeah, this is a total cat.

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Speaker 2: You know.

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Speaker 3: It occurs to me like the sort of the very

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Speaker 3: strict Chicago school. There's no such thing. Everyone people love

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Speaker 3: to say, there's no such thing as that you can't

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Speaker 3: as passive investing. You can sort of get close to it,

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Speaker 3: you know, the strict Chicago school people is like, you know,

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Speaker 3: you buy the global market portfolio at their market value,

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Speaker 3: every investable asset in the world. These rules essentially make

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Speaker 3: it impossible, right because if you had some stock that

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Speaker 3: was I don't know, got so big it was twenty

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Speaker 3: five percent of the index or whatever, but you're not

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Speaker 3: allowed to do it technically, like you really couldn't buy

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Speaker 3: the true market portfolio given some of these constraints.

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Speaker 5: That's correct, and that's an IRS constraint. And then not

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Speaker 5: only that, just stop and think about if you go

437
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Speaker 5: and you try to recreate these portfolios at a broker.

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Speaker 5: I spoke to one investment advisor. He said, if I

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Speaker 5: went and made a portfolio of the qqqs, like if

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Speaker 5: I just made it from scratch and did all those things,

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00:23:20,800 --> 00:23:24,120
Speaker 5: that compliance would tell me that I'm too concentrated in

442
00:23:24,280 --> 00:23:27,040
Speaker 5: tech stocks. So he says, I'm not allowed to buy

443
00:23:27,080 --> 00:23:30,280
Speaker 5: this from a compliance point of view, but I'm allowed

444
00:23:30,280 --> 00:23:33,359
Speaker 5: to buy the client's qqqs. And that's back to my

445
00:23:33,520 --> 00:23:35,920
Speaker 5: point is that we all just kind of been lulled

446
00:23:35,960 --> 00:23:39,919
Speaker 5: into this feeling that everything's okay. It's a it's a

447
00:23:39,960 --> 00:23:44,280
Speaker 5: broad index, and it's no longer as broad. And ironically,

448
00:23:44,320 --> 00:23:49,119
Speaker 5: you're talking about this idea about the mart the indexing,

449
00:23:49,359 --> 00:23:51,959
Speaker 5: and if you remember Mike Green and his theory that

450
00:23:53,240 --> 00:23:56,360
Speaker 5: the big will get bigger because of indexing, and more

451
00:23:56,440 --> 00:23:58,960
Speaker 5: and more people will just continue and this will create

452
00:23:59,000 --> 00:24:01,480
Speaker 5: a situation where the biggest stocks will continue to just

453
00:24:01,520 --> 00:24:04,760
Speaker 5: get bigger and bigger and bigger. Well, we're here, this

454
00:24:04,800 --> 00:24:08,800
Speaker 5: is happening. And my pushback to that argument has always

455
00:24:08,880 --> 00:24:13,640
Speaker 5: been that he's assuming the market doesn't work. He's assuming

456
00:24:13,680 --> 00:24:17,440
Speaker 5: nobody goes and says, hey, wait, those stocks are too big.

457
00:24:17,840 --> 00:24:20,080
Speaker 5: I'm going to go and no longer be benched to

458
00:24:20,080 --> 00:24:22,199
Speaker 5: the S and P five hundred. I'm going to be

459
00:24:22,200 --> 00:24:26,560
Speaker 5: benched to Russell one thousand or maybe three thousand. I'll

460
00:24:26,680 --> 00:24:29,720
Speaker 5: change it and see. This is the problem is that

461
00:24:30,240 --> 00:24:34,080
Speaker 5: many clients have kind of career risk, So if they're

462
00:24:34,160 --> 00:24:38,160
Speaker 5: bench to the S and P five hundred, they can't

463
00:24:38,200 --> 00:24:41,400
Speaker 5: go and put this huge bet where they don't own

464
00:24:41,440 --> 00:24:44,000
Speaker 5: the mag seven or they just say no, I can't

465
00:24:44,000 --> 00:24:46,879
Speaker 5: own it, it's too expensive. They need to go and

466
00:24:46,920 --> 00:24:49,439
Speaker 5: they need to own those stocks. But if you're a

467
00:24:49,440 --> 00:24:52,920
Speaker 5: fiduciary that's managing money for someone, and you go and

468
00:24:52,960 --> 00:24:55,280
Speaker 5: you say, listen, this doesn't make any sense.

469
00:24:55,880 --> 00:24:57,320
Speaker 4: We're buying this s and P.

470
00:24:57,440 --> 00:24:59,479
Speaker 5: Five hundred And the original reason what we did it

471
00:24:59,560 --> 00:25:01,360
Speaker 5: was because it it was supposed to be this diversified

472
00:25:01,359 --> 00:25:04,680
Speaker 5: basket of the whole market. This no longer makes sense.

473
00:25:04,760 --> 00:25:07,560
Speaker 5: Let's go try to find something else so you can

474
00:25:07,680 --> 00:25:12,520
Speaker 5: change your benchmark. Now, ironically, that actually takes a lot

475
00:25:12,560 --> 00:25:14,600
Speaker 5: of hassle and it's difficult.

476
00:25:14,680 --> 00:25:17,679
Speaker 4: You have to go and you have to convince all.

477
00:25:17,640 --> 00:25:20,920
Speaker 5: The users of your product or the or the end

478
00:25:20,920 --> 00:25:24,520
Speaker 5: clients to switch it. And that is why in this

479
00:25:24,600 --> 00:25:28,160
Speaker 5: situation with the Russell one thousand growth, instead of making

480
00:25:28,200 --> 00:25:32,240
Speaker 5: a new benchmark that is capped, they said, no, we're

481
00:25:32,280 --> 00:25:35,720
Speaker 5: just going to change the existing rules of the existing index.

482
00:25:36,280 --> 00:25:39,960
Speaker 5: So if you want an unconstrained Russell one thousand growth,

483
00:25:40,480 --> 00:25:43,800
Speaker 5: there is a new index that Russell has created, But

484
00:25:44,280 --> 00:25:46,840
Speaker 5: in this case it's going to be everyone that is

485
00:25:46,920 --> 00:25:49,160
Speaker 5: the Russell one thousand growth, and it's a lot of them.

486
00:25:49,200 --> 00:25:51,800
Speaker 5: Like you go, you pull it up, you'll see twenty billion,

487
00:25:52,400 --> 00:25:55,879
Speaker 5: forty billion, lots of people with big, big accounts that

488
00:25:55,920 --> 00:25:58,600
Speaker 5: are benched to this. They're gonna all of a sudden

489
00:25:58,760 --> 00:26:03,600
Speaker 5: find themselves overweight mag seven because there's a shift that's

490
00:26:03,600 --> 00:26:07,399
Speaker 5: occurring on the March expiry March twenty first.

491
00:26:08,000 --> 00:26:11,560
Speaker 1: So, Kevin, you mentioned Russell making this decision to change

492
00:26:11,600 --> 00:26:14,639
Speaker 1: the existing index rather than create a new one, And

493
00:26:14,680 --> 00:26:16,639
Speaker 1: this is exactly what I wanted to ask you about,

494
00:26:16,680 --> 00:26:19,840
Speaker 1: which is, you know, when we talk about benchmark index providers,

495
00:26:20,200 --> 00:26:24,359
Speaker 1: we talk about them as being passive, right. They always

496
00:26:24,400 --> 00:26:28,680
Speaker 1: say they create these indices that are basically holding up

497
00:26:29,000 --> 00:26:32,800
Speaker 1: a mirror to markets and trying to reflect them as

498
00:26:32,880 --> 00:26:36,680
Speaker 1: they exist right now, and that kind of I'm a

499
00:26:36,720 --> 00:26:39,960
Speaker 1: little skeptical of that approach because I do think index

500
00:26:40,040 --> 00:26:43,560
Speaker 1: construction affects things like flows. It's kind of reflexive, and

501
00:26:43,600 --> 00:26:45,479
Speaker 1: I do think there are a lot of you know,

502
00:26:46,080 --> 00:26:49,760
Speaker 1: judgment calls that are embedded when you're deciding what to

503
00:26:49,800 --> 00:26:53,359
Speaker 1: include and what to exclude. But if they're making an

504
00:26:53,400 --> 00:26:57,760
Speaker 1: active decision to change the weighting on something like tech,

505
00:26:58,119 --> 00:27:01,320
Speaker 1: does that perhaps open them up to more or scrutiny

506
00:27:01,800 --> 00:27:03,120
Speaker 1: perhaps from regulators.

507
00:27:04,560 --> 00:27:08,200
Speaker 5: Well, I wouldn't say from regulators. It's more scrutiny from

508
00:27:08,200 --> 00:27:11,840
Speaker 5: the clients. But in this case, they're not actually saying

509
00:27:11,880 --> 00:27:14,679
Speaker 5: they don't want more tech. They're saying, we need to

510
00:27:14,680 --> 00:27:17,400
Speaker 5: comply with this twenty five to five point fifty rule,

511
00:27:18,040 --> 00:27:21,639
Speaker 5: which is an IRS rule. It has nothing to do with,

512
00:27:22,800 --> 00:27:24,840
Speaker 5: you know, a decision that they think that the mag

513
00:27:24,960 --> 00:27:26,240
Speaker 5: seven's gotten too risky.

514
00:27:27,240 --> 00:27:27,440
Speaker 4: Right.

515
00:27:27,480 --> 00:27:31,880
Speaker 5: The index providers are there to provide whatever index they

516
00:27:31,880 --> 00:27:35,160
Speaker 5: think they can sell to their clients. If their clients

517
00:27:35,240 --> 00:27:38,000
Speaker 5: want something, they're going to do it and by that token.

518
00:27:38,480 --> 00:27:41,719
Speaker 5: Interestingly enough, we see the S and P five hundred

519
00:27:41,800 --> 00:27:45,560
Speaker 5: Earlier this spring introduced a capped version of the S

520
00:27:45,640 --> 00:27:49,800
Speaker 5: and P five hundred, which has individual stocks capped to

521
00:27:49,880 --> 00:27:54,080
Speaker 5: three percent. Now Here in Canada, we've actually already listed

522
00:27:54,080 --> 00:27:58,000
Speaker 5: an ETF based upon this index. But the reason that

523
00:27:58,560 --> 00:28:01,560
Speaker 5: SMP has created in nexus because there's a demand for

524
00:28:01,640 --> 00:28:06,879
Speaker 5: it and ultimately the clients will drive it. What I

525
00:28:07,040 --> 00:28:10,600
Speaker 5: thought was so interesting about this whole development is that

526
00:28:10,640 --> 00:28:15,639
Speaker 5: we're seeing index providers having to change their rules because

527
00:28:15,640 --> 00:28:18,200
Speaker 5: of this twenty five five point fifty. Then we're also

528
00:28:18,320 --> 00:28:24,200
Speaker 5: seeing institutional pension funds endowments starting to question whether they

529
00:28:24,359 --> 00:28:28,720
Speaker 5: want to continue with benchmarks that have such a large concentration.

530
00:28:29,560 --> 00:28:33,120
Speaker 5: And this is combined with the fact that many retail

531
00:28:33,200 --> 00:28:37,000
Speaker 5: don't really understand what they're buying when they buy the

532
00:28:37,080 --> 00:28:39,840
Speaker 5: S and P five hundred. So when I look at

533
00:28:39,920 --> 00:28:42,160
Speaker 5: this situation and think about how this is going to

534
00:28:42,200 --> 00:28:46,920
Speaker 5: play out going forward, I can make the argument that

535
00:28:47,040 --> 00:28:50,480
Speaker 5: we're kind of at the peak of concentration here and

536
00:28:50,520 --> 00:28:55,000
Speaker 5: that this is the market correcting what has become too

537
00:28:55,080 --> 00:28:56,480
Speaker 5: concentrated of a market.

538
00:28:58,360 --> 00:29:01,280
Speaker 3: You know, going back to this idea that the big

539
00:29:01,560 --> 00:29:05,240
Speaker 3: just keep getting bigger, and you mentioned some of Mike

540
00:29:05,240 --> 00:29:08,000
Speaker 3: Green's theories, and you know, there is this view that

541
00:29:08,080 --> 00:29:12,120
Speaker 3: some have that like the funds themselves, the ETFs, the

542
00:29:12,160 --> 00:29:15,600
Speaker 3: index funds like create this mechanical flows and that flows

543
00:29:15,640 --> 00:29:18,000
Speaker 3: to the biggest stocks and they keep going up and

544
00:29:18,080 --> 00:29:18,520
Speaker 3: et cetera.

545
00:29:18,640 --> 00:29:19,880
Speaker 1: Flows before pros.

546
00:29:19,920 --> 00:29:22,800
Speaker 3: As Tracy has coined it, Do you still have that

547
00:29:22,840 --> 00:29:24,240
Speaker 3: in your message, Nim Tracy?

548
00:29:24,280 --> 00:29:26,120
Speaker 1: I think I do, but only because I'm lazy and

549
00:29:26,360 --> 00:29:27,760
Speaker 1: haven't been bothered to replace it.

550
00:29:28,120 --> 00:29:31,240
Speaker 3: But on the other hand, we're recording this January twenty

551
00:29:31,320 --> 00:29:34,840
Speaker 3: second and one of the biggest stocks in the market.

552
00:29:34,920 --> 00:29:39,800
Speaker 3: Apple has significantly underperformed all year. So the QQQ the

553
00:29:39,800 --> 00:29:43,480
Speaker 3: indices are up, but Apple's actually significantly down this year

554
00:29:43,520 --> 00:29:47,920
Speaker 3: concerns about iPhone sales. It still looks to me that

555
00:29:48,880 --> 00:29:51,880
Speaker 3: maybe there's some mechanical flows going on, but there is

556
00:29:52,920 --> 00:29:57,920
Speaker 3: individual security selection and marginal price setting still happening, so

557
00:29:58,000 --> 00:30:01,120
Speaker 3: that despite like all these the flows that on some

558
00:30:01,320 --> 00:30:03,680
Speaker 3: level you know that they're you know, if a company

559
00:30:03,840 --> 00:30:07,360
Speaker 3: is if they're concerns about a company's performance, it doesn't

560
00:30:07,360 --> 00:30:08,600
Speaker 3: just mechanically go higher.

561
00:30:08,640 --> 00:30:10,920
Speaker 5: You're right, Joe, But I would push back and say

562
00:30:10,960 --> 00:30:13,840
Speaker 5: that I'm cliff as in Camp that it's become a

563
00:30:13,880 --> 00:30:19,680
Speaker 5: lot less efficient. There's less and less fundamental investors going

564
00:30:19,680 --> 00:30:24,000
Speaker 5: out and actually buying and selling stocks based upon fundamentals.

565
00:30:24,440 --> 00:30:27,920
Speaker 5: And not only that, Cliff won't tell you this, but

566
00:30:28,080 --> 00:30:30,440
Speaker 5: if you think about it, part of the reason the

567
00:30:30,480 --> 00:30:35,240
Speaker 5: market has become less efficient is because of quants themselves.

568
00:30:36,000 --> 00:30:39,920
Speaker 5: They become a larger and larger portion of the trading

569
00:30:40,080 --> 00:30:43,160
Speaker 5: in the market. These pod shops, and I have nothing

570
00:30:43,160 --> 00:30:47,640
Speaker 5: against them, they're producing some absolutely stellar returns risk adjusted.

571
00:30:47,680 --> 00:30:48,560
Speaker 4: They're out of the world.

572
00:30:48,640 --> 00:30:51,520
Speaker 5: They're terrific but a lot of it is based upon

573
00:30:52,120 --> 00:30:56,840
Speaker 5: following momentum and doing things like earnings revisions and other

574
00:30:57,000 --> 00:31:02,400
Speaker 5: kind of pro like short term pro cyclical movements, so

575
00:31:02,440 --> 00:31:05,760
Speaker 5: there's very little of the kind of dual David Einhorn,

576
00:31:05,880 --> 00:31:08,720
Speaker 5: I'm buying a stock because it's for you know, a

577
00:31:08,840 --> 00:31:12,400
Speaker 5: four pe, and I'm planning on selling it at seven pe.

578
00:31:12,600 --> 00:31:14,640
Speaker 5: When everyone figures out that earnings are going to be

579
00:31:14,640 --> 00:31:19,880
Speaker 5: better than expected, now it's much more. Next quarters, EPs

580
00:31:19,960 --> 00:31:21,960
Speaker 5: is going to be slightly higher. That means the earnings

581
00:31:22,000 --> 00:31:25,080
Speaker 5: revisions ticked up, and therefore all of our models mean

582
00:31:25,120 --> 00:31:27,040
Speaker 5: that you need to buy, and everyone rushes into it,

583
00:31:27,080 --> 00:31:29,280
Speaker 5: and then the CTAs follow and it just ends.

584
00:31:29,120 --> 00:31:30,400
Speaker 4: Up feeding upon itself.

585
00:31:31,160 --> 00:31:34,880
Speaker 5: So I'm not quite sure I completely agree with you, Joe,

586
00:31:34,920 --> 00:31:38,240
Speaker 5: that that everything is great with the markets. It really

587
00:31:38,280 --> 00:31:41,200
Speaker 5: does feel to me like it's become less efficient, not more.

588
00:31:41,400 --> 00:31:43,760
Speaker 1: All Right, Kevin Muir, I am so glad that we

589
00:31:43,920 --> 00:31:45,719
Speaker 1: finally got you on the show and we have to

590
00:31:45,720 --> 00:31:47,040
Speaker 1: do it again. Thank you so.

591
00:31:47,080 --> 00:31:50,200
Speaker 4: Much, my pleasure, Thank you for having me on.

592
00:31:50,480 --> 00:32:06,560
Speaker 1: Thanks that's great, Joe, that was so much fun. I'm

593
00:32:06,600 --> 00:32:08,640
Speaker 1: so glad we finally had Kevin on the show and

594
00:32:08,680 --> 00:32:11,480
Speaker 1: he even brought you, you know, dot com era of femine.

595
00:32:11,480 --> 00:32:13,400
Speaker 3: I know, I love it. I love this topic. I

596
00:32:13,400 --> 00:32:15,760
Speaker 3: mean I just think about it all the time. I

597
00:32:16,120 --> 00:32:19,080
Speaker 3: even wrote about it in the newsletter this week. Every

598
00:32:20,440 --> 00:32:23,720
Speaker 3: month Bank of America does their hedge fund or their

599
00:32:23,760 --> 00:32:25,960
Speaker 3: fund manager survey, and one of the questions they ask

600
00:32:26,120 --> 00:32:28,640
Speaker 3: is what do you perceive as the most crowded trade?

601
00:32:29,320 --> 00:32:33,600
Speaker 3: And basically, like almost every month for years now, it's

602
00:32:33,600 --> 00:32:38,760
Speaker 3: been some it's some version of big tech. And you know,

603
00:32:38,920 --> 00:32:40,760
Speaker 3: like you're like, typically you think, oh, this is a

604
00:32:40,800 --> 00:32:43,280
Speaker 3: crowded trade, it can't go on. But the move has

605
00:32:43,320 --> 00:32:45,200
Speaker 3: been to play the crowded trade.

606
00:32:45,440 --> 00:32:49,000
Speaker 1: Yeah. Absolutely, and you're right to some extent that's been

607
00:32:49,320 --> 00:32:53,000
Speaker 1: justified by earnings. But I think I think there is

608
00:32:53,160 --> 00:32:56,479
Speaker 1: like this reflexivity that I mentioned at play in the market,

609
00:32:56,560 --> 00:32:59,600
Speaker 1: where you know, the big attract more inflows, they get

610
00:32:59,600 --> 00:33:03,160
Speaker 1: more capital, they get bigger, maybe they get more pricing power,

611
00:33:03,200 --> 00:33:05,280
Speaker 1: and then that leads to more earnings. So you have

612
00:33:05,360 --> 00:33:07,200
Speaker 1: this sort of cycle going on.

613
00:33:07,320 --> 00:33:11,600
Speaker 3: I mean, well, for whatever reason, we're in an era

614
00:33:12,240 --> 00:33:14,600
Speaker 3: and I would say there is a winner take all

615
00:33:14,720 --> 00:33:18,160
Speaker 3: this across the economy. Yeah, that you see for sure,

616
00:33:18,240 --> 00:33:21,400
Speaker 3: And how much of that is financial flows, how much

617
00:33:21,600 --> 00:33:26,440
Speaker 3: of it is real economic outcomes. I guess my inclination

618
00:33:26,560 --> 00:33:28,920
Speaker 3: is still to look and say, you know, the earnings

619
00:33:29,000 --> 00:33:33,200
Speaker 3: growth of these names are unbelievable, but whatever the reason,

620
00:33:34,000 --> 00:33:37,080
Speaker 3: everyone is now all in on the same bet. And

621
00:33:37,200 --> 00:33:40,480
Speaker 3: Kevin made the point about career risk, which is really key,

622
00:33:40,520 --> 00:33:43,160
Speaker 3: which is that even if you think you've identified something

623
00:33:43,160 --> 00:33:45,880
Speaker 3: else or maybe a better way to diversify, et cetera,

624
00:33:46,400 --> 00:33:49,400
Speaker 3: do you really want to be the one person who like, oh,

625
00:33:49,440 --> 00:33:52,680
Speaker 3: I'm gonna like shave down my Nvidia exposure or do

626
00:33:52,680 --> 00:33:54,480
Speaker 3: you just want to ride with everyone else at the

627
00:33:54,480 --> 00:33:54,960
Speaker 3: same time.

628
00:33:55,680 --> 00:33:59,280
Speaker 1: You know, one of my favorite benchmark controversies is there's

629
00:33:59,320 --> 00:34:01,120
Speaker 1: actually a lot of if you think about, you know,

630
00:34:01,200 --> 00:34:04,880
Speaker 1: like including Chinese bonds, including Chinese shares and things like that.

631
00:34:05,000 --> 00:34:09,759
Speaker 1: But there there was this big kerfuffle among frontier and

632
00:34:09,960 --> 00:34:12,080
Speaker 1: em investors.

633
00:34:11,440 --> 00:34:13,480
Speaker 4: About Kuwait huh.

634
00:34:13,560 --> 00:34:17,480
Speaker 1: Kuwait was included in the MSCI Frontier Index for the

635
00:34:17,520 --> 00:34:20,480
Speaker 1: longest time, and a lot of people didn't like that

636
00:34:20,680 --> 00:34:24,600
Speaker 1: because Kuwait is this like fairly small country with only

637
00:34:24,640 --> 00:34:28,719
Speaker 1: four million people and like a pretty small GDP, and

638
00:34:28,840 --> 00:34:33,040
Speaker 1: everyone was like, why can't we have more Vietnam or

639
00:34:33,120 --> 00:34:36,759
Speaker 1: something like that. So eventually they kicked Kuwait out of

640
00:34:36,800 --> 00:34:39,960
Speaker 1: the Frontier Index and sent it to em and everyone

641
00:34:40,080 --> 00:34:43,399
Speaker 1: was happy, that's a good story starting Kuwait. Presumably it's

642
00:34:43,440 --> 00:34:47,279
Speaker 1: a good story. Yeah, thanks. Shall we leave it there?

643
00:34:47,320 --> 00:34:48,399
Speaker 3: Let's leave it there, all right.

644
00:34:48,520 --> 00:34:51,080
Speaker 1: This has been another episode of the Odd Lots podcast.

645
00:34:51,200 --> 00:34:54,240
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.

646
00:34:54,400 --> 00:34:56,719
Speaker 3: And I'm Jill Wisenthal. You can follow me at the

647
00:34:56,760 --> 00:35:00,880
Speaker 3: Stalwart Follow or guest Kevin Muir. He's at Kevin Follow.

648
00:35:00,920 --> 00:35:04,440
Speaker 3: Our producers Kerman Rodriguez at Kerman ermann Dashel Bennett at

649
00:35:04,480 --> 00:35:08,360
Speaker 3: dashbot and kill Brooks at Kilbrooks. For more Oddlots content,

650
00:35:08,400 --> 00:35:10,600
Speaker 3: go to Bloomberg dot com slash odd Lots. We have

651
00:35:10,680 --> 00:35:13,359
Speaker 3: transcripts a blog in the newsletter, and you can shout

652
00:35:13,400 --> 00:35:17,480
Speaker 3: about all of these topics, including index concentration and markets

653
00:35:17,480 --> 00:35:21,280
Speaker 3: and investing in our discord discord dot gg slash odlog.

654
00:35:21,800 --> 00:35:24,120
Speaker 1: And if you enjoy all lots, if you like it

655
00:35:24,160 --> 00:35:27,640
Speaker 1: when we talk about benchmark index providers, then please leave

656
00:35:27,719 --> 00:35:31,760
Speaker 1: us a positive review on your favorite podcast platform. And remember,

657
00:35:31,840 --> 00:35:34,520
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658
00:35:34,719 --> 00:35:38,000
Speaker 1: all of our episodes absolutely ad free. All you need

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Speaker 1: to do is find the Bloomberg channel on Apple Podcasts

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Speaker 1: and follow the instructions there. Thanks for listening behind it